Are you mystified that the S&P 500 is only down 13% from its February high and the NASDAQ is slightly positive year to date? You would think that all the bad economic numbers would dampen investor’s confidence in owning stocks. However, publicly trading companies on Wall Street have a number of advantages over Main Street.

When it comes to government bailouts and subsidies, large public companies seem to be first in line. There are always claims that help is needed to save jobs or what they produce is an essential product or service. However, many of these companies used their cash to buy back stock and pay big executive bonuses instead of saving for a rainy day. (Airline industry)

The Federal Reserve’s zero interest rate policy helps large public companies to sell bonds at low rates to stay afloat, a huge advantage over small and medium sized privately owned companies.

The Federal Reserve has the bond and stock market’s back. They are adding liquidity to the bond market by buying corporate debt and even buying high yield or junk bonds to keep interest rates low. This allows even the worst run companies to avoid bankruptcy.

Why I think that Wall Street shouldn’t be so optimistic regarding an economic recovery:

I agree with comments made by Fed Chair Jerome Powell who cautioned of a potential credit crunch as stimulus dollars start to dry up. The result would be the loss of thousands of small and medium sized businesses across the country. Owners of many bars, restaurants, gyms and clothing stores have stated that they are fearful of being able to cover their operating costs while limiting the number of customers allowed into their premises.

So far, 32 publicly traded companies have already filed for bankruptcy protection under chapter 11 which leaves many of their employees, suppliers and shareholders high and dry. The economic pain from Covid 19 could be long lasting as more companies file for bankruptcy protection. The recovery may take some time to gather momentum as some jobs will never come back.

It is hard to comprehend that Wall Street is dismissing the fact that all the jobs that were created over the past ten years have disappeared in just under three months. . The weekly jobless claims will continue to be momentous and don’t included workers who want a full time job but are working part time. It also doesn’t include many Americans who are out of work and don’t qualify for unemployment insurance.

I wonder, is it even possible to get people back to work without safely opening up schools and daycares? France reopened their schools last week and 70 new cases of Covid 19 were found in seven schools forcing them to close them again. A new concern for parents is an outbreak of a inflammatory syndrome in children that is linked to Covid 19. Cases of Inflammatory syndrome have been diagnosed in 27 states in the United States.

Doctors have warned that many U.S. states have reopened without meeting CDC guidelines. The number of positive cases have spiked already in 14 states over the past few weeks. A rising death toll in the U.S. hasn’t stop many Americans from avoiding large social gatherings, ignoring social distancing guidelines and refusing to wearing a mask. There is a high probability that another spike in cases and deaths will dampen consumer spending.

Lastly baby boomers, (60 to 75 years old) have the most disposable income and also face the highest risk of dying from Covid 19. As a baby boomer, I will be avoiding the all travel and leisure activities.

Air travel

Cruising

Resorts and hotels

Movie theatres

Sit down restaurants

Casinos

Theme parks

Sporting events

Concerts

I will avoid anywhere there is large gathering or requires close personal contact. I am not going to risk my life to get a haircut or go to my local pub to watch a sporting event. It is just a matter of time when Wall Street profits will be affected by lack of consumer spending.

The latest economic numbers seem to confirm my view that this recession is going to be worse than the last great recession. The U.S. first-quarter gross domestic product report of -4.8% underscores the economic devastation of the Covid 19 virus. The contraction in GDP was the largest drop since late 2008. Keep in mind that shelter in place and social distancing was only started in March in North America.

The drop of -7.6% in personal consumption was double the rate during the worst point of the global financial crisis. Other areas of the economy that resemble the last recession is a decline of 8.6% in business fix capital spending. The U.S. unemployment claims hit 30 million in just six weeks and an estimated 9 to 14 million more claims were not made because of online claim application systems were crashing.

The great recession of 2008-09, taught me that interest rates are likely to stay lower for longer. The Federal Reserve didn’t raise interest rates until Dec 2015 keeping zero interest rates for 7 years. The current yield of 10 year U.S. Treasuries has fallen to half a percent, a level not seen during the last recession.

Pension plans and retired seniors require monthly income however current yields on treasuries, gov’t and corporate bonds are not going to be enough to meet their needs. It may take another decade before interest rates get back to a more normal level. I believe that investors will have no choice but to switch from bonds and buy dividend paying stocks.

Unfortunately, many companies are preparing for a long and deep recession by cutting their dividends or temporary eliminating them all together. For example, Royal Dutch Shell cut its dividend for the first time since World War II by 66%, General Motors suspended their dividend and share buybacks. I have found many companies in a variety of industries that have also cut or suspended their dividends.

Mutual funds and ETFs (exchange traded funds) that specialize in investing in dividend stocks will have to adjust their holdings as more companies could join the dividend cutting or suspension club.

Why has the month of April seen the best stock market returns in decades.

Some money managers are betting that the economy will rebound in third quarter of this year.

Pension funds are rebalancing their portfolios by reducing their bond holding and buying stocks.

The earlier than expected reopening of the economy is making investors more confident to buy stocks.

Preliminary results that the drug Remdesivir reduces the recovery time for patients with the coronavirus and a hopeful development of a vaccine increased investors enthusiasm for stocks.

In my opinion, this looks like a sucker rally. The average recession lasts for about 11 months and the great recession that started in 2008 lasted for 18 months. Plus, medical experts predict that a second wave of this virus will hit in the fall. Japan and Hong Kong have already seen a small second wave of the virus after reopening parts of their economies. I am in no rush to jump into this uncertain market.

Looking back at the last recession, there are two sectors that I would avoid: energy (XLE) and financials (XLF), both underperformed the overall S&P 500 illustrated by the chart below which shows the performance of these two sectors from Jan 2008 until May 2020.

Two sectors that outperformed the S&P 500 during the same period were technology (XLK) and healthcare (XLV) illustrated in the chart below. Please note however, Amazon is not considered a tech stock but is included in consumer discretionary (XLY).

Stock pickers may have an edge during this recession. Over the past 10 years, the technology sector has outperformed the overall market thanks to the FAANG stocks. Individual investors who over weighted their portfolios with Facebook, Apple, Amazon, Netflix and Google had higher returns than most index and exchange traded funds.

I use a combination of owning some individual stocks and sector ETFs in my portfolio. Here are some telecommunication and pharmaceuticals stocks that are on my watch list which offer some safety and high dividend yields.

AT&T (Ticker: T) yields 6.9%,

Bell Canada (Ticker: BCE) yields 6%

Orange (Ticker: ORAN) yields 6.5%

Glaxosmithkline (GSK) yields 6%

AbbVie (ABBV) yields 5.6%.

Common sense tells me that consumers will not be traveling, going to sporting events, movie theaters, theme parks, restaurants or concerts anytime soon. Many business can’t make a profit with current social distancing guidelines. It means that airlines will have to increase prices, many of your favorite restaurants will disappear and shopping online with curbside pick up will be the norm.

Warren Buffett has said “Never bet against America” and yet he is holding on to mountains of cash waiting to buy. Sound advice during these turbulent markets.

The last time we had zero interest rates was during the great recession of 2008-09. If you are a movie buff, that was one scary horror movie. Unfortunately, the sequel maybe even scarier. The plot, so far, is similar in many ways. The world faces a major crisis with high unemployment, massive government spending (bailouts), zero interest rates and central banks printing money.

How do you make a horror movie scarier than the original? The writer has to intensify the plot line and add some terrifying developments not seen in the original movie.

This crisis affects the whole world with every economy feeling the pain.

The percentage of people unemployed could be worse than the great depression of the 1930’s (25% or more)

The government stimulus package was in the billions last time and now in the trillions with more to come.

Central banks are buying huge amounts of government debt and now are buying low grade corporate debt. (Even some junk bonds)

More terrifying developments

Although tragic that many consumers lost their homes in the last recession, small business failures will have a more negative effect on the economy. Small businesses are responsible for employing 48% of the U.S. workforce and have generated 65% of net new jobs over the past 17 years. The unemployment rate will be higher for longer.

Consumer spending accounts for 70% of economy growth. Unemployed consumers will have less money to spend. Plus, images of body bags and continuing daily death counts will inhibit consumers from risking their lives to go out and even spend money. The last recession had little impact on travel, movie theaters, theme parks, sporting events, restaurants and bars. These businesses will continue to suffer until consumer confidence returns

The last recession didn’t produce long lines at grocery stores. Disruption of food production was unheard of and has become a real concern as some meat packaging plants have been forced to temporarily shut down. A shortage of fruit and vegetables could be next as migrate workers could face high rates of infection.

Normally a drop in oil prices has a positive effect on consumer spending but a total collapse does more harm than good. Oil companies have started to suspend capital expenditures, cut dividend payouts and reduced their workforce. Countries which depend on revenues from oil production will face large budget deficits making it harder for them to stimulate their economies.

Food banks are experiencing a surge from a high number of people who have never needed their help before. Images of long line ups are popping up all over the United States.

There was a coordinated world response to the financial crisis which is sorely lacking in dealing with this pandemic. Too many leaders are more concern with keeping their jobs than going their job.

The spread of misinformation by some world leaders and some media outlets could cause a second wave of this virus. The image below is an example of irresponsible leadership. Some of these people will get sick and some may even die. However, they will also spread the virus to their families, their friends and critical medical personal at hospitals. Being a Canadian, I hope that a change in leadership in the United States will help the North American economies recover sooner rather than later.

How will this horror movie end?My best guess is when a scientist shows up holding a treatment in one hand and a vaccine in the other!

It is difficult to write a financial blog when the death count from Corvid -19 keeps going up every day. However, the big question is when we will get back to normal? I think you have to look back in history at the Spanish flu of 1918 for some clues.

Policies used to reduce the spread of Corvid -19 are similar to what was done to reduce the spread of the Spanish flu. Unfortunately, isolation, quarantine of infected people, use of disinfectants and limitations of public gatherings were applied unevenly. (Sounds familiar?) Back then, the Spanish flu came in waves and infected 500 million people, about a third of the world’s population. It lasted from Jan 2018 until Dec 1920 and somewhere around 50 million people died.

I fear that world leaders are more worried about keeping their jobs then doing their jobs. Their slow reaction of issuing stay at home orders for non-essential workers will prolong the spread of the Corvid-19. In my humble opinion, a V-shape recovery is overly optimistic.

The roll out of government programs to get money into the hands of individuals, small business and bailouts of large corporation will take a long time to be effective.

Many government websites are crashing from the number of requests for aid.

Many small businesses will go bankrupt before the relief funds arrive.

The aid to businesses are in the form of loans which add extra operating costs, this will hider rehiring employees.

The United States had 16.5 million unemployment applications over the past three weeks which is just a small sampling of what is to come.

This is a world recession so leisure and travel will be impacted for a long time. Plus business travel, conventions and hotel stays will be limited.

The best case scenario would be a slow and cautious U shape economic recovery. What is needed is accurate testing of people who would be allowed to go back to work. Also, a quick development of a vaccine and an effective treatment for people who are infected with the virus.

The worse case scenario would be an L or W shape economic recovery. Rushing to reopen the whole economy could cause a second wave of the Covid-19 outbreak, killing thousands of more people and shutting down businesses all over again.

I am not investing based on stock market experts who tend to be overly optimistic. I am listening to the doctors who specialize on disease control. Their timeline of a vaccine is 12 to 18 months away. Therefore this recession will probably last around 18 to 24 months. The chart below illustrates that happen to the S&P 500 during the last recession of 2008-09:

This chart illustrates the past two years of the S&P:

I am not an expert on charts but I think that there is a good chance that what we are seeing is a bear market rally. There is more bad news coming that hasn’t been priced into stock prices. I would suggest that you play it safe and sell into stock market rallies and hold on to your cash.

This week, after an emergency call with central bank leaders around the world, the Federal Reserve cut interest rates. A somewhat surprising move coming about two weeks before its next scheduled meeting. It was the first emergency rate cut by the Fed since the financial crisis in 2008 and a strong signal that the central bank is taking the threat of the virus seriously.

The problem is that cutting interest rates, which were already very low, isn’t likely to do much to solve the kinds of economic problems posed by a pandemic.

Think of it like this: if more people get sick, more people can’t work. Businesses become less productive and ailing workers without paid sick leave don’t earn money. (They might also go to work sick.) Meanwhile, others who are either sick or afraid of catching the virus stop going out and spending money.

Restaurants, movie theaters, hotels and airlines have already experienced less revenue. More workers will lose their jobs temporary, so fewer people will have money to spend. Its classic cause of an economic downturn since the U.S. economy depends on consumers’ spending money.

Crucially, all the people out of work will still need money for food and housing costs. The new record-low mortgage rates aren’t going to solve that immediate problem, especially not for renters. Nearly 4 in 10 adults would have trouble handling a $400 emergency expense, according to a recent study from the Federal Reserve.

An economic downturn is coming, the problem is no one knows how severe it will be and how long will it last. China’s economy took a big hit and government took some draconian measures that can’t be done here in North America.

Some precautionary financial steps

Top up your emergency fund

Living pay check to paycheck: then get a line of credit or increase the limits on your credit cards

Start looking for day care services in case of school closures

Don’t put any new money into the stock market until the coronavirus is contained. (Too early to buy the dips, however make an investment shopping list)

Get ready to refinance your debt, but keep in mind that there could be more rate cuts.

Why you shouldn’t panic over a decline in stock market prices

The chart below illustrate what happen to stock market values during the financial crisis. (Jan 2008 until Mar 2011) The left side of the graph shows the market hit bottom in Mar of 2009 and recovered most of it losses by Mar of 2011. I not suggesting that this current market downturn will get that bad.

Keep in mind that the stock market has gone straight up since the market hit bottom back in march of 2009 with a few little blips. The chart below illustrates that the current downturn could be just another blip. This virus will only have a temporary effect on the economy and consumer spending will recover. People will travel again, visit theme parks, eat out and business will be profitable again.

Back in September, I wrote a post to reduce some of your risk and move some money into dividend paying stocks. I hope that you followed my advice. Dividend income should help to offset some of the fall in value of your portfolio.

Around this time last year, a U.S. government shutdown forced many government workers to go into debt to pay bills and some even had to go to food banks to make ends meet. They eventually got back pay but it is a good example of why you need an emergency fund. According to a recent survey from Charles Schwab, 59% of Americans say that they are living paycheck to paycheck, despite the fact that the U.S. economy has experienced the longest expansion period in its history.

I have no idea when the good times will end. However, financial experts recommend having an emergency fund in case you lose your job. The financial rule of thumb is to cover 3 months of living expenses if you qualify for unemployment insurance and 6 months if you are self-employed. I am a bit surprised that they also recommend the need to have funds available for unexpected car or appliance repairs. People who own homes or cars should include such repairs in their annual budgets.

I would recommend making two budgets, one for when you have a job and an emergency budget for when you lose your job. Divide your budget into needs, wants and savings. Needs are expenses you can’t avoid, like mortgage, rent, car loans, food etc. Wants are things you could do without if necessary, like clothes and entertainment. Saving for retirement, college or extra debt payments should also be excluded from your emergency budget.

Once you calculate your absolute bare bones budget, you can start to put money aside every month into an emergency saving account. With tax season just around the corner, you could jump start your savings but including any expected tax refund.

Tips for people living paycheck to paycheck or for those that can’t save fast enough

Apply for a secured line of credit if you own your own home

Don’t own a home, then apply for an unsecured line of credit

Use a line of credit to pay off your credit card balances and put the interest savings into an emergency savings account.

Going into debt is not a great option but it is better than losing your home or having to sell your car.

Do you know the fable of the ant and the grasshopper? In essence, the ant spends all summer gathering food for the winter while the grasshopper sings and fiddles the summer away. When winter comes the Grasshopper has no food and found itself dying of hunger, while it saw the ants distributing corn and grain from the stores they had collected during the summer.

What are the risks facing us in the next year or two? The inversion of the yield curve which has happen on three separate occasions has me worried. It signals more stock market volatility, it is a sign that the bond market fears subpar economic growth and that a trade war could cause a global recession.

Historically an inverted yield curve has been a reliable, though not perfect, predictor of a recession. Each of the last five recessions was preceded by the two and 10 year Treasury yields inverting. (the two year yield is higher than the 10 year yield)

So, is the Bond Market Insane?

We now have $17 trillion worthof negative interest rate bonds, mostly in the sovereign bond space. That is about 25% of the entire bond market and 43% of bonds outside the US. In simple terms, you buy a $100 bond but pay $105 for it and you are guarantee to get $100 back when the bond matures. Who in their right mind would buy an investment that if held to maturity would lose money?

There has never been such an animal in the classification of bonds. Until a few years ago, traders and investors around the world would have considered negative rate bonds as imaginary as a children’s fairytale.

Mark Grant wrote this about negative interest rates in Europe:

While the European Union is not creating “Pixie Dust Money,” at the ECB, and then buying their own nations’ sovereign, and corporate debt, to purposefully hurt the financial markets, or the United States, that is exactly the “collateral damage,” that they are causing. The nations of the EU cannot afford to pay for their budgets, or their social programs, so the ECB has moved down their borrowing costs to less than zero, in most cases.

Since I am retired, the recommended withdraw rate from my retirement account is 4%. Interest from bonds are not meeting my needs.

Dividend paying stocks will lose some value during the next recession but less than the overall stock market. Plus, I will get paid to wait for the stock market to recover.

In Canada, the dividend tax credit increases my after tax return by 25% over bonds.

The next recession could be extra long because Central banks have already lowered interest rates. They will have less tools to stimulate the economy when a recession hits.

The yield of both Canadian & U.S. 10 year bonds are below inflation which reduces the value of money over time.

Telecommunication companies like AT&T (Ticker: T) and Bell Canada (Ticker: BCE) have dividend yields of 5.7% and 5.08% which are much higher than bond yields. Some Canadian banks also have dividend yields in the 5% area and they continue to raise them. (ticker symbols: BNS & CM).

These are not recommendations but examples to illustrate that they are a wide variety of dividend paying stocks with higher yields than bonds. They are not recession proof but do provide a steady income stream. Keep in mind that even cash isn’t safe because inflation will over time reduce its purchasing power.